Frontier markets show divergent credit paths: Moody’s

Moody’s Investors Service says that frontier markets (FMs) will show differentiated credit exposure to rising interest rates globally, just as they demonstrated divergent shock absorption capacities during the commodity price slump of 2014-2015.

In addition, the debt levels of FM sovereigns will remain elevated and they will continue to spend more on debt service costs in the next year.

“Benign global liquidity conditions have permitted some FMs to raise commercial USD sovereign debt, at relatively favorable rates,” says Anne Van Praagh, a Moody’s Managing Director. “One quarter of FMs had issued new debt on commercial terms as of August 2017. Meanwhile, some FMs are relying on finance and investment from China and less on multilateral concessional debt.”

“Looking ahead, as global liquidity conditions evolve, elevated debt service costs and liquidity risks are key credit challenges for FMs,” she said. “The ability of individual FMs to handle rising interest rates and rollover of commercial debt is differentiated. Vulnerabilities are highest for those countries where high leverage combines with a constrained ability by domestic policymakers to ease monetary policy and preserve fiscal flexibility.”

Moody’s says that the strength of institutions determines a sovereign’s ability to counter negative shocks, such as a rise in global capital costs. In many FMs, weak institutions constrain their ability to buffer against shocks.

In addition, direct external vulnerability risks are high for around one quarter of FM sovereigns that Moody’s rates. Reliance on foreign capital to fund current account deficits heightens the vulnerability of these sovereigns to capital outflows or lower inflows that can exacerbate difficulties in meeting current account and external debt payment obligations.

Moody’s rates 36 FM countries, most of which carry ratings in the B1-B3 range. Of the 36, downgrades have outnumbered upgrades and none have climbed to investment grade since their sovereign rating was initiated.

Moody’s will be elaborating on its assessment of FMs when Van Praagh speaks on a Frontier Markets panel at the 2017 IIF Annual Membership Meeting on October 11, 2017 at the Ronald Reagan Building and International Trade Center in Washington, DC.

The Thilaka Filling Station in Kalmunai was opened at Batticaloa Road, Kalmunai recently.The opening was presided over by Thilaka Filling Station Proprietor V. Alagurajah and was graced by Lanka IOC...